A week ago, the question of the day was how could technical analysis possibly work in the environment we are in. Levels were breaking all over the place and there are many who believe that levels are the key to technical analysis. For me that is not the key. The key remains the indicators.
But what a difference a week makes.
Now the questions center on if the low is in. Oh, it seems everyone wants to know if last week was the low. I believe that's a change in sentiment, because we've moved from "levels are breaking all over the place" to, basically, was that '"level" the low?
I do not know if it is the low. But what I do know is that there tends to be a process that takes place after a decline such as we've had. That process plays out with an initial oversold rally and then another trip back down. Can we make a lower low? Sure. No one knows.
But if we do, we'd look for fewer stocks making new lows. We'd look for a higher low in the Overbought/Oversold Oscillator. We'd look for perhaps a lower high in the Volatility Index as well. In other words, we'd look for things to be "less bad" on that trip down.
I have used several different time frames to show you how this can often play out. In 2008, we looked at the rally off the Bear Stearns low from March. That did not top out until May. We looked at the rally off the Thanksgiving low that did not top out until the first days of 2009.
We have also looked at the rally off the 9/11 low in late September that had a big surge followed by months of ups and downs. And then there is always that 2010 chart -- where I would remind you I still think this current phase is the first rally off the plunge -- so perhaps we're circa late May/early June.
If there is one takeaway in all of this, it is that it is a process and not an event. It only looks like an event in hindsight.
As for Monday's rally, the breadth was so poor, it's difficult to spin it as a positive. Let's look at it like this. Monday's 85 point rally in the S&P saw net breadth on the New York Stock Exchange at positive 600. Friday's 88 point decline saw net breadth at negative 1,700. It just didn't even come close to recapturing that loss from Friday.
It didn't change any of the indicators, though. The short-term Oscillator is a little bit overbought. The intermediate-term Oscillator is still oversold. The put/call ratio is still high and the 10-day moving average of the put/call ratio is still declining.
I'd say all in all, Monday was quite disappointing, if you are bullish. But I still think it's too soon for a real retest. We're more likely to do a lot of ups and downs now.